Annual Report siemens.com

Transcription

1 Annual Report 2016 siemens.com

2 Table of contents A. B. C. Combined Management Report Consolidated Financial Statements Additional Information A.1 p 2 Business and economic environment A.2 p 8 Financial performance system A.3 p 10 Results of operations A.4 p 15 Net assets position A.5 p 16 Financial position A.6 p 20 Overall assessment of the economic position A.7 p 21 Subsequent events A.8 p 22 Report on expected developments and associated material opportunities and risks A.9 p 35 Siemens AG A.10 p 37 Compensation Report A.11 p 51 Takeover-relevant information B.1 p 56 Consolidated Statements of Income B.2 p 57 Consolidated Statements of Comprehensive Income B.3 p 58 Consolidated Statements of Financial Position B.4 p 59 Consolidated Statements of Cash Flows B.5 p 60 Consolidated Statements of Changes in Equity B.6 p 62 Notes to Consolidated Financial Statements C.1 p 118 Responsibility Statement C.2 p 119 Independent Auditor ʼs Report C.3 p 121 Report of the Supervisory Board C.4 p 124 Corporate Governance C.5 p 133 Notes and forward- looking statements

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4 A.1 Business and economic environment A.1.1 The Siemens Group A ORGANIZATION AND BASIS OF PRESENTATION We are a technology company with core activities in the fields of electrification, automation and digitalization, and activities in nearly all countries of the world. Siemens comprises Siemens AG, a stock corporation under the Federal laws of Germany, as the parent company and its subsidiaries. Our Company is incorporated in Germany, with our corporate headquarters situated in Munich. As of September 30, 2016, Siemens had around 351,000 employees. Siemens has the following reportable segments: the Divisions Power and Gas; Wind Power and Renewables; Energy Management; Building Technologies; Mobility; Digital Factory; and Process Industries and Drives as well as the separately managed business Healthineers (formerly called Healthcare), which together form our Industrial Business. The Division Financial Services (SFS) supports the activities of our Industrial Business and also conducts its own business with external customers. As global entrepreneurs our Divisions and Healthineers carry business responsibility worldwide, including with regard to their operating results. Our reportable segments may do business with each other, leading to corresponding orders and revenue. Such orders and revenue are eliminated on the Group level. A BUSINESS DESCRIPTION The Power and Gas Division offers a broad spectrum of products and solutions for generating electricity from fossil fuels and for producing and transporting oil and gas. The portfolio includes gas turbines, steam turbines, generators to be applied to gas or steam power plants, compressor trains, integrated power plant solutions, and instrumentation and control systems for power generation. Customers are public utilities and independent power producers; companies in engineering, procurement and construction that serve these companies; international and national oil companies; and industrial customers that generate power for their own consumption. Due to the broad range of its offerings, the Division s revenue mix may vary from reporting period to reporting period depending on the share of revenue attributable to products, solutions and services. Because typical profitability levels differ among these three revenue sources, the revenue mix in a reporting period accordingly affects Division profit for that period. The Wind Power and Renewables Division designs, manufactures and installs wind turbines for onshore and offshore applications. This includes both geared turbines and direct drive turbines. The product portfolio is based on four product platforms, two each for onshore and offshore applications. The Division primarily serves large utilities and independent power producers. Due to the significant offshore business of the Division and its activities in the Northern hemisphere, production and installations are typically higher during spring and summer months because of the more favorable weather and marine conditions during those seasons. The Division s revenue mix may vary from reporting period to reporting period depending on the project mix between onshore and offshore projects in the respective period. The Division also includes a minority stake in a hydro power business. In June 2016, Siemens and Gamesa Corporación Tecnológica, S. A. (Gamesa) signed binding agreements to merge the Siemens wind power business, including service, with Gamesa. The two businesses are highly complementary regarding global footprint, existing product portfolios and technologies. The combined business is expected to have a global reach across all relevant regions and manufacturing footprints on all continents. Accordingly, the transaction will result in a product offering covering all wind classes and addressing all key market segments. Siemens will own 59 % of the shares of the combined entity. As part of the merger, Siemens will fund a cash payment of 1 billion which will be distributed to Gamesa s shareholders (excluding Siemens) immediately following the completion of the merger. Closing of the transaction is subject to the approvals of the antitrust and regulatory authorities. The Power Generation Services Division offers a comprehensive set of services for products, solutions and technologies of the Power and Gas and Wind Power and Renewables Divisions, covering performance enhancements, maintenance services, customer training and professional consulting. Financial results of these two Divisions include the corresponding financial results of the Power Generation Services Division, which itself is not a reportable segment. Based on this business model, all discussions of the services business for Power and Gas as well as Wind Power and Renewables concern the Power Generation Services Division. The Energy Management Division offers a wide spectrum of products, systems, solutions, software and services for transmitting and distributing power and for developing intelligent grid infrastructure. The Division s customers include power providers, network operators, industrial companies, infrastructure developers and construction companies. The offerings are used to process and transmit electrical power from the source down to various load points along the power transmission and distribution networks to the power consumers. Our solutions for smart grids enable a bidirectional flow of energy and information, which is required for the integration of more renewable energy sources into conventional power transmission and distribution networks. The Division also offers solutions and energy storage systems for integrating renewable energy into power grids, together with 2 Combined Management Report

5 vertical IT software applications that link energy consumers and producers. In addition, the Division s portfolio includes power supply solutions for conventional power plants and renewable energy systems as well as substations for urban and rural distribution networks. The Division also offers energy-efficient solutions for heavy industry, the oil and gas industry and the process industries. The Building Technologies Division is a leading provider of automation technologies and digital services for safe, secure and efficient buildings and infrastructures throughout their lifecycles. The Division offers products, solutions, services and software for fire safety, security, building automation, heating, ventilation, air conditioning and energy management. The large customer base is widely dispersed. It includes owners, operators and tenants for both public and commercial buildings; building construction general contractors; and system houses. Changes in the overall economic environment generally have a delayed effect on the Division s business activities. Particularly in the solutions and service businesses, Building Technologies is affected by changes in the non-residential construction markets with a time lag of two to four quarters. The Mobility Division combines all Siemens businesses in the area of passenger and freight transportation, including rail vehicles, rail automation systems, rail electrification systems, road traffic technology, IT solutions and related services. The Division provides its customers with consulting, planning, financing, construction, service and operation of turnkey mobility systems. Mobility also provides integrated mobility solutions for networking of different types of traffic systems. The principal customers of the Mobility Division are public and state-owned companies in the transportation and logistics sectors. Markets served by Mobility are driven primarily by public spending. Customers usually have multi-year planning and implementation horizons, and their contract tenders therefore tend to be independent of shortterm economic trends. The Digital Factory Division offers a comprehensive product portfolio and system solutions used in manufacturing industries, complemented by lifecycle and data-driven services. These offerings enable customers to optimize entire value chains from product design and development to production and services. With its comprehensive offering, the Division supports manufacturing companies with the transformation towards the Digital Enterprise, resulting in increased flexibility and efficiency of production processes and reduced time to market for new products. The Division supplies customers in discrete, process and hybrid manufacturing industries. Changes in the level of demand are strongly driven by macroeconomic cycles, and can lead to significant short-term variation in market performance. In the third quarter of fiscal 2016, Digital Factory further strengthened and expanded its software business by acquiring CD-adapco, a U. S.- based provider of simulation software. For more information on the acquisition of CD-adapco, see NOTE 3 in B.6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. The Process Industries and Drives Division offers a comprehensive product, software, solution and service portfolio for moving, measuring, controlling and optimizing all kinds of mass flows. With its know-how in vertical industries including oil and gas, shipbuilding, mining, cement, fiber, chemicals, food and beverage, and pharmaceuticals, the Division increases productivity, reliability and flexibility of machinery and installations along their entire life cycle jointly with its customers. Based on data models and analysis methods, Process Industries and Drives paves the way together with its customers to create a Digital Enterprise, from process simulation via plant design and documentation through to asset and performance management. The Division s offerings include an integrated portfolio with products, components and systems such as couplings, gears, motors and converters, process instrumentation systems, process analytics devices, wired and wireless communication, industrial identification and power supplies up to systems level with decentralized control systems, industrial software as well as customized, application- specific systems and solutions. It also sells gears, couplings and drive solutions to other Siemens Divisions, which use them in rail transport and wind turbines. Demand within the industries served by the Division generally shows a delayed response to changes in the overall economic environment. Even so, the Division is strongly dependent on investment cycles in its key industries. In commodity-based process industries such as oil and gas or mining, these cycles are driven mainly by commodity price fluctuations rather than changes in produced volumes. Healthineers ( Healthcare before renaming in May 2016) is one of the world s largest suppliers of technology to the healthcare industry and a leader in medical imaging and laboratory diagnostics. We provide medical technology and software solutions as well as clinical consulting services, supported by a complete set of training and service offerings. Therefore, we offer our customers a comprehensive portfolio of medical solutions along the continuum of care from prevention and early detection to diagnosis, treatment and follow-up care. Because large portions of our revenue stem from recurring business, our business activities are to a certain extent resilient to short-term economic trends. They are, however, dependent on regulatory and public policy developments around the world. Healthineers is organized into six business areas: Diagnostic Imaging, Laboratory Diagnostics, Advanced Therapies, Ultrasound, Point of Care Diagnostics and Services. The Financial Services (SFS) Division supports its customers investments with leasing solutions and equipment, project and Combined Management Report 3

6 structured financing in the form of debt and equity investments. Based on its comprehensive financing know-how and specialist technology expertise in the areas of Siemens businesses, SFS provides financial solutions for Siemens customers as well as other companies, and also manages financial risks of Siemens. SFS operates the Corporate Treasury of the Siemens Group, which includes managing liquidity, cash and interest risks as well as certain foreign exchange, credit and commodities risks. Business activities and tasks of Corporate Treasury are reported in the segment information within Reconciliation to Consolidated Finan cial Statements. A RESEARCH AND DEVELOPMENT Our research and development (R & D) activities are ultimately geared to developing innovative, sustainable solutions for our customers and the Siemens businesses and simultaneously safeguarding our competitiveness. For these reasons, we focus in particular on enabling energy supplies that are economically sustainable; further enhancing efficiency in the generation of renewable and conventional power and minimizing losses during power transmission; finding novel solutions for smart grids and for the storage of energy from renewable sources with irregular availability; promoting the efficient utilization of energy, especially in build ings, industry and transportation, e. g. through highly efficient drives for production facilities or for local and longdistance trains; creating the highly flexible, connected factories of tomorrow using advanced automation and digitalization technologies; turning unstructured data into value-adding information, e. g. when providing services such as preventive maintenance; advancing the integration of medical imaging technology, in vitro diagnostics and IT for medical engineering to support improved patient outcomes. Beyond these points of focus, we recognize how important highly sophisticated software solutions are for all the fields of business in which Siemens is active. R & D activities are carried out by our businesses as well as our Corporate Technology (CT) department. Corporate Technology is both a creative driver of disruptive innovations and a partner to the Siemens businesses. Its R & D activities are focused on the Company s core activities in the fields of electrification, automation and digitalization. In many research projects, CT works closely with scholars from leading universities and research institutions. These partnerships, along with close collaborations with start-ups, are an important part of Siemens open innovation concept, which is designed to make the Company even more innovative. In fiscal 2016, Siemens announced the creation of an autonomous unit that will place the Company s partnership with startups on a much higher level: next47. The unit went into operation in October It has been given a budget of 1 billion for its first five years. With the creation of next47, Siemens plans to further enhance its innovativeness and speed up the introduction of innovations to the marketplace. next47 is focusing on five innovation fields: artificial intelligence, distributed electrification, autonomous machines, blockchain applications and connected electric mobility. Electrically powered flight is an example of a disruptive development being pursued by next47. In cooperation with Airbus, Siemens intends to demonstrate by 2020 that electricity can be used to power large planes. In fiscal 2016, we reported research and development expenses of 4.7 billion, compared to 4.5 billion in fiscal The resulting R & D intensity, defined as the ratio of R & D expenses and revenue, was 5.9 % the same level as in fiscal Additions to capitalized development expenses amounted to 0.3 billion in both fiscal 2016 and 2015, mainly at Healthineers. As of September 30, 2016, Siemens held approximately 59,800 granted patents worldwide in its continuing operations. As of September 30, 2015, it held approximately 56,200 granted patents. On average, we had 33,000 R & D employees in fiscal Research and Development in our Businesses R & D at the Power and Gas Division concentrates on developing products and solutions for enhancing efficiency, flexibility and economy in power generation and in the oil and gas industry. These products and solutions include turbomachinery primarily high-performance, low-emission gas turbines for single operation or for combined cycle power plants and compressor solutions for various process industries. The Division s current technology initiative, which started in fiscal 2015, is aimed at intensifying R & D in innovative materials, advanced manufacturing methods and plant optimization. Along with promoting digitalization in overall product lifecycles, Power and Gas is on track preparing for changing energy markets and their increasingly diversified centralized and decentralized structures. At the Wind Power and Renewables Division, our R & D efforts are focused on innovative products and solutions that allow us to take the lead in performance, improve our competitiveness, and build a stronger business case for customers. This includes finding ways to more intelligently monitor and analyze turbine conditions, and smart diagnostic services. Our R & D efforts also focus on digitalization. At our remote diagnostics center in Brande, Denmark, we collect digital data from more than 10,000 turbines in more than 30 countries, which total more than 24 million data sets annually. We use this data to provide value for our customers: in 85 % of cases, issues can be corrected and turbines restarted without sending out a service team. 4 Combined Management Report

7 The R & D activities of our Energy Management Division focus on preparing our portfolio for changes on all voltage levels in the world of electricity. The increasing infeed of renewable energy to power grids requires that those grids become more flexible and efficient, particularly with distributed generation on the rise. The digitalization of future grids will enable intelligent grid operation and data-driven services. Cost-out programs and optimization of our footprint are improving the competitiveness of our product portfolio on global markets. Our innovations are centered on power electronics, digitalization or grid stabilization. The full integration of energy supply systems with process automation is a core portfolio element for industrial applications and infra structures. R & D work at the Building Technologies Division focuses on optimizing comfort, operational and energy efficiency in buildings and infrastructures, protecting against fire and security hazards, and minimizing related risks. We aim to create a portfolio of products and services ranging from the field to the cloud, based on open standards wherever possible. This includes data-based services for new ways of optimizing energy consumption, easily scalable and reasonably priced services, a new and harmonized system landscape with effective integration of electrical consumption, fire detection and HVAC (heating, ventilation, air conditioning) systems, and a complete range of products tailored specifically to growing markets. The Mobility Division s R & D strategy addresses customers demand for maximum availability, high throughput and enhanced passenger experience. Although there is a growing need for mobility worldwide, possibilities for building new roads and railways are limited. Meeting the demand for mobility requires intelligent solutions that make transport more efficient, safe and environmentally friendly. Reflecting this, Mobility s R & D activities emphasize digitalization in developing state-of-the art rail vehicles, automation solutions for rail and road traffic, and rail electrification systems. Most of these goals can be achieved only with intelligent IT solutions such as WLAN-based control systems for driverless and conductorless metro train operation, decentralized wayside architecture for rail automation, cloud-based product solutions, and Integrated Mobility Platforms that intelligently network passengers, mobility service providers and traffic manage ment centers. One of the R & D priorities at the Digital Factory Division is the Digital Enterprise Software Suite. It includes Teamcenter software. Serving as a data backbone, Teamcenter digitizes the entire product lifecycle management (PLM) process from product design through planning and engineering to production and service. In addition, the TIA (Totally Integrated Automation) Portal engineering platform is being intensively improved. Thanks to its open interfaces, it exchanges data with other systems. The seamless link to simulation tools enhances the benefits of virtual commissioning, which is used to identify flaws at an early stage and in a cost-effective manner. Data-based services are another field of research. Siemens offers MindSphere, an industry cloud that industrial companies can use to develop and provide their own digital services. As a result, new types of services such as predictive maintenance and resource optimization can be provided. Machinery and plant builders can use it to monitor production operations around the world. MindSphere helps them reduce downtimes and offer new business models. The focus of R & D activities in the Process Industries and Drives Division is on the digital transformation of products, solutions and services for all sectors in the process industry, such as oil and gas, chemicals and pharmaceuticals. Information and communication technologies (ICT) play a crucial role in areas such as improvements in instrumentation, analytics, industrial communication and process control systems. The end-to-end use of ICT is as essential a prerequisite for the expansion of drive and transmission platforms by means of integrated condition monitoring and service cloud connections as it is for the commissioning and operation of processing plants or the use of computer-assisted simulations to support their operators. The same applies for new service offerings that complement operational engineering data with additional condition-related data (condition monitoring) and use it for purposes such as asset management. The digitalization of our comprehensive process automation and industrial communication portfolio includes a holistic industrial security concept. Another central objective of our R & D activities is to further increase energy efficiency while reducing the consumption of raw materials and cutting emissions. This applies to our own product creation processes as well as to our customers processes that are facilitated by our products (systems, solutions and services). The R & D activities of Healthineers are directed toward our growth fields in therapy, molecular diagnostics, and services. We want to tap the full potential of imaging solutions in therapy and to establish a closer connection between diagnostics and therapy in cardiology, interventional clinical disciplines, surgery, and radiation oncology. Strategic partnerships are an essential part of our strategy to reach this goal. Expanding our innovation map beyond our established portfolio, and investing in new ideas will help us tap new business fields. For example, we will extend our activities in the highly dynamic growth field of molecular diagnostics. We will expand our services business beyond productrelated services by adding a digital services portfolio and increasing enterprise transformation services to help customers in their transition to value-based care within more and more provider organizations across geographical borders. Combined Management Report 5

8 A.1.2 Economic environment A WORLDWIDE ECONOMIC ENVIRONMENT The development of the world economy in fiscal 2016 again resulted in diminished expectations through the course of the year. After a slight improvement in sentiment indicators in the first quarter, economic activity unexpectedly slowed down in the second and third quarters of fiscal The growth slowdown was also evident in the development of international trade volume. As in recent years, sluggish aggregate demand, particularly for investment goods, held back growth. This was influenced significantly by high levels of political and economic uncertainty arising from conflicts in Syria and Iraq, the failed coup in Turkey and U. K. s vote to leave the European Union, among other factors. The growth slowdown was especially evident in the U. S. economy in the second and third quarters of fiscal 2016, followed by modest acceleration of economic activity in the fourth quarter. The main reason for this development was an inventory reduction which was substantially resolved by the end of the fiscal year. In addition, the strong US$ weighed on U. S. exports and improved conditions for imports. The Chinese economy continued its path of rebalancing toward a more consumption- and domestic-demand-driven economy, which has so far been accompanied by a steady decline in economic growth rates. However, the stability of China s economy was partly caused by stimulus measures which have slowed the country s progress on this path. In Europe, economic activity also decelerated considerably in the second and third quarters of fiscal Risks in the European banking system resurfaced. The largely unexpected Brexit vote in June 2016 added uncertainty though the consequences in the following months did not match the initial concerns. While raw material prices increased following a slump in the second quarter of fiscal 2016, commodity exporting countries still were burdened with overcapacities due to former investment overhangs in extractive sectors. Associated reductions in government spending further weighed on economic activity. All in all, the negative effects outweighed the positive ones. During the course of the fiscal year, growth forecasts for global gross domestic product (GDP) for calendar 2016 declined from 2.9 % in Octo ber 2015 to 2.4 % in October Fixed investments are expected to expand by 1.7 % in calendar 2016, down from 3.4 % previously forecast in October The partly estimated figures presented here for GDP and fixed investments are calculated by Siemens based on an IHS Markit report dated October 15, A MARKET DEVELOPMENT The markets of the Power and Gas Division remained challenging in fiscal This was again particularly evident in the market for steam turbines, where volume shrank substantially yearover-year due to an ongoing shift from coal-fired to gas-fired power generation in the U. S. and emission regulation such as in China. Demand in compression markets also fell year-over-year due to continued reduction in capital expenditure for oil and gas upstream applications. In contrast, demand in the gas turbine market continued to grow in fiscal 2016, driven by rising demand for energy in emerging countries, demand for replacement of aged, inefficient and inflexible power plants; the above-mentioned shift from coal to gas, particularly in the U. S.; an energy market reform in Mexico; large projects in Egypt; diversification towards gas power plants in China and countries in Latin America and the Middle East. The Division s competition consists mainly of two groups: a relatively small number of equipment manufacturers, some with very strong positions in their domestic markets, and on the other hand a large number of engineering, procurement and construction contractors. The gas turbine market is experiencing overcapacity among original equipment manufacturers and engineering, procurement and construction contractors, which is leading to market consolidation. Following strong demand in fiscal 2015, market volume for the markets served by the Wind Power and Renewables Division declined moderately in fiscal The decline was due to the onshore wind power market segment, only partly offset by growth in the relatively smaller offshore wind power market segment. On a regional basis, the decline was most evident in the Americas, particularly including Brazil and the U. S., and in Asia, Australia, particularly including China, where the largest national wind market in the world remains largely closed to foreign manufacturers. In Europe, in contrast, demand for wind power grew in both the onshore and the offshore market segments. The competitive situation in wind power differs in the two major market segments. In the markets for onshore wind farms, competition is widely dispersed without any one company holding a dominant share of the market, while markets for offshore wind farms continue to consist of a few experienced players. Consolidation is moving forward in both on- and offshore segments, including exits of smaller players. The key drivers of consolidation are increasing price pressure as well as technology challenges and market access challenges, which increase development costs and the importance of risk-sharing in offshore wind power. Market development continues to depend strongly on energy policy, including tax incentives in the U. S. and regulatory frameworks in Germany and the U. K. With continued technological progress 6 Combined Management Report

9 and cost reduction, dependency on subsidy schemes is expected to decrease in the long term. Markets addressed by the Energy Management Division grew moderately in fiscal The utilities market, the Division s single largest customer segment, showed clear growth, benefiting from major energy transmission investments in Egypt and Qatar and from large interconnection projects, particularly in China and India. The chemicals and the construction industries grew slightly. Growth in the chemicals industry was driven by the Americas, where some process industries showed a trend towards re-industrialization in the U. S. and a build-up of capacities within the region overall. Within the construction industry, increased investments in North America were largely offset by a slow-down in investing activities in Asia, particularly in China. Demand from the metals industry remained on the prior-year level, while the oil and gas industry continued to reduce capital expenditures due to low oil prices. Competitors of the Energy Management Division consist mainly of a small number of large multinational companies. International competition is increasing from manufacturers in emerging countries such as China, India and Korea. Markets for the Building Technologies Division grew moderately in fiscal Growth was driven by solid demand from the U. S. and Asia, despite softening growth rates in China. Within the Europe, C. I. S., Africa, Middle East region, markets in the Middle East grew stronger than the region overall. The recovery of the European market was weaker than expected but included stable growth in Germany. The Division s principal competitors are multi national companies. Its solutions and services business also competes with system integrators and small local companies. The Division faces continuing price pressure, particularly in its solutions business, due to strong competition from system houses and some larger competitors. Markets for the Mobility Division grew moderately in fiscal 2016, with all regions contributing to growth. Market development in the Europe, C. I. S., Africa, Middle East region was characterized by continuous investment and awards of large orders. This was particularly evident in Germany and the U. K. Demand in the Middle East and in Africa was mainly driven by turnkey and rail infrastructure projects. In the Americas region, growth continued to benefit from demand for passenger locomotives and urban transport products in the U. S. Within the Asia, Australia region, Chinese markets saw ongoing investments in high-speed trains, urban transport and rail infrastructure, while India awarded large orders as part of the country s transportation infrastructure build-out. The Division s principal competitors are multinational companies. Consolidation among Mobility s competitors is continuing. In fiscal 2016, market volume for the markets addressed by the Digital Factory Division came in slightly below the level in fiscal Global manufacturing production grew only modestly but showed some signs of growth stabilization towards the end of the fiscal year. Consumer-oriented industries and the global auto motive industry, which is one of the most important endcustomer industries of the Division, remained on a stable growth path. In contrast, mining- and oil-related industries continued to suffer from low raw material prices. Demand from the machinebuilding industry declined modestly year-over-year as investments were held back due mainly to uncertainties in the global political and economic environment. The competition for Digital Factory s business activities can be grouped into two categories: multinational companies that offer a relatively broad portfolio and companies that are active only in certain geographic or product markets. Market volume for the markets addressed by the Process Industries and Drives Division declined moderately in fiscal This was due mainly to reductions in capital expenditures by customers in commodity-related industries such as oil and gas, mining, cement and metals. Towards the end of the fiscal year, demand from those industries began to stabilize. As described for Digital Factory above, global manufacturing production grew only modestly while the consumer-oriented industries served by Process Industries and Drives, such as food and beverage and pharmaceuticals continued their growth path. Competitors of the Division s business activities can be grouped into two categories: multinational companies that offer a relatively broad portfolio and companies that are active only in certain geographic or product markets. Consolidation is taking place mostly in particular market segments and not across the broad base of the Division s portfolio. In particular, consolidation in solution-driven markets is going in the direction of in-depth niche market expertise. Most major competitors have established global bases for their businesses. In addition, the competition has become increasingly focused on technological improvements and cost position. Markets served by Healthineers grew moderately in fiscal 2016 as growth in the U. S. and in Europe more than offset weakness in Latin America. Growth in China was stabilizing, though growth rates came in lower than at the beginning of the decade. The diagnostic imaging market segment grew slightly. While demand for imaging procedures continued to grow, this trend was partly offset by price pressure and increased utilization rates. The markets for ultrasound and in-vitro diagnostics grew moderately. Development in the ultrasound market segment benefits from increasing access to healthcare services. The market for in-vitro diagnostics is expanding due to population and income growth in emerging markets and the rising importance of diagnostics in improving healthcare quality. For the healthcare industry as a whole, the trend towards consolidation continues. Competition among the leading companies is strong, including with respect to price. Combined Management Report 7

10 A.2 Financial performance system A.2.1 Overview Within One Siemens, we have established a financial framework for revenue growth, for profitability and capital efficiency, for our capital structure, and for our dividend policy. A.2.2 Revenue growth Within the framework of One Siemens, we aim to grow our revenue faster than the average weighted revenue growth of our most relevant competitors. Our primary measure for managing and controlling our revenue growth is comparable growth, because it shows the development in our business net of currency translation effects, which arise from the external environment outside of our control, and portfolio effects, which involve business activities which are either new to or no longer a part of our business. Currency translation effects are the difference between revenue for the current period calculated using the exchange rates of the current period and revenue for the current period calculated using the exchange rates of the comparison period. For calculating the percentage change year-over-year, this absolute difference is divided by revenue for the comparison period. A portfolio effect arises in the case of an acquisition or a disposition and is calculated as the change year-over-year in revenue of the relevant business resulting specifically from the acquisition or disposition. For calculating the percentage change, this absolute change is divided by revenue for the comparison period. For orders, we apply the same calculations for currency translation and portfolio effects as described above. A.2.3 Profitability and capital efficiency Within the framework of One Siemens, we aim to achieve margins through the entire business cycle that are comparable to those of our relevant competitors. Therefore, we have defined profit margin ranges for our industrial businesses, which are based on the profit margins of the respective relevant competitors. Profit margin ranges Margin range Power and Gas % Wind Power and Renewables 5 8 % Energy Management 7 10 % Building Technologies 8 11 % Mobility 6 9 % Digital Factory % Process Industries and Drives 8 12 % Healthineers % SFS (ROE after tax) % In line with common practice in the financial services business, our financial indicator for measuring capital efficiency at the Financial Services Division (SFS) is return on equity after tax, or ROE after tax. ROE is defined as SFS profit after tax, divided by the Division s average allocated equity. For purposes of managing and controlling profitability at the Group level, we use net income as our primary measure. This measure is the main driver of basic earnings per share (EPS) from net income, which we use in communication to the capital markets. To emphasize and evaluate our continuous efforts to improve productivity, we incorporated a measure called total cost productivity into our One Siemens framework. We define this measure as the ratio of cost savings from defined productivity improvement measures to the aggregate of functional costs for the Siemens Group. We aim to achieve an annual value of 3 % to 5 % for total cost productivity. Within the framework of One Siemens, we seek to work as profitably and efficiently as possible with the capital provided by our shareholders and lenders. For purposes of managing and controlling our capital efficiency, we use return on capital employed, or ROCE, as our primary measure. We aim to achieve a range of 15 % to 20 %. 8 Combined Management Report

11 A.2.4 Capital structure Sustainable revenue and profit development is supported by a healthy capital structure. Accordingly, a key consideration within the framework of One Siemens is to maintain ready access to the capital markets through various debt products and preserve our ability to repay and service our debt obligations over time. Our primary measure for managing and controlling our capital structure is the ratio of industrial net debt to EBITDA. This financial measure indicates the approximate amount of time in years that would be needed to cover industrial net debt through income from continuing operations, without taking into account interest, taxes, depreciation and amortization. We aim to achieve a ratio of up to 1.0. A.2.5 Dividend We intend to continue providing an attractive return to our shareholders. Therefore, we intend to propose a dividend whose distribution volume is within a dividend payout range of 40 % to 60 % of net income, which we may adjust for this purpose to exclude selected exceptional non-cash effects. As in the past, we intend to fund the dividend payout from Free cash flow. At the Annual Shareholders Meeting, the Managing Board, in agreement with the Supervisory Board, will submit the following proposal to allocate the unappropriated net income of Siemens AG for fiscal 2016: to distribute a dividend of 3.60 on each share of no par value entitled to the dividend for fiscal year 2016 existing at the date of the Annual Shareholders Meeting, with the remaining amount to be carried forward. Payment of the proposed dividend is contingent upon approval by Siemens shareholders at the Annual Shareholders Meeting on February 1, The prior-year dividend was 3.50 per share. The proposed dividend of 3.60 per share for fiscal 2016 represents a total payout of 2.9 billion based on the estimated number of shares entitled to dividend at the date of the Annual Shareholders Meeting. Based on net income of 5.6 billion for fiscal 2016, the dividend payout percentage is 52 %. A.2.6 Calculation of return on capital employed Calculation of ROCE Fiscal year (in millions of ) Net income 5,584 7,380 Less: Other interest expenses / income, net 1 (544) (662) Plus: SFS Other interest expenses / income Plus: Net interest expenses from post-employment benefits Less: Interest adjustments (discontinued operations) Less: Taxes on interest adjustments (tax rate (flat) 30 %) (156) (104) (I) Income before interest after tax 5,949 7,623 (II) Average capital employed 41,573 36,367 (I) / (II) ROCE 14.3 % 21.0 % 1 Item Other interest expenses / income, net primarily consists of interest relating to corporate debt, and related hedging activities, as well as interest income on corporate assets. Average capital employed is determined using the average of the respective balances as of the quarterly reporting dates in the period under review. Calculation of capital employed Total equity Plus: Long-term debt Plus: Short-term debt and current maturities of long-term debt Less: Cash and cash equivalents Less: Current available-for-sale financial assets Plus: Post-employment benefits Less: SFS Debt Less: Fair value hedge accounting adjustment Plus: Adjustments from assets classified as held for disposal and liabilities associated with assets classified as held for disposal Less: Adjustment for deferred taxes on net accumulated actuarial gains / losses on post-employment benefits Capital employed (continuing and discontinued operations) Combined Management Report 9

12 A.3 Results of operations A.3.1 Orders and revenue by region Negative currency translation effects took one percentage point each from order and revenue development; portfolio effects added one percentage point to order development and two percentage points to revenue growth. The resulting ratio of orders to revenue (book-to-bill) for Siemens in fiscal 2016 was 1.09, again well above 1. The order backlog (defined as the sum of order backlogs of the industrial businesses) was 113 billion as of September 30, Orders (location of customer) Fiscal year % Change (in millions of ) Actual Comp. Europe, C. I. S., Africa, Middle East 46,185 42,539 9 % 9 % therein: Germany 10,525 11,991 (12)% (13)% Americas 24,794 24,769 0 % (3)% therein: U. S. 18,162 17,357 5 % (2)% Asia, Australia 15,501 15,033 3 % 3 % therein: China 6,850 6,623 3 % 7 % Siemens 86,480 82,340 5 % 4 % therein: emerging markets 1 30,512 29,730 3 % 5 % 1 As defined by the International Monetary Fund. Despite further softening in the macroeconomic environment in fiscal 2016, reported orders related to external customers increased moderately year-over-year. Within the regions, order development depended strongly on the timing and location of large contract wins in the Divisions that typically take in such orders. In the Europe, C. I. S., Africa, Middle East region, orders increased clearly, as substantial growth in Wind Power and Renewables and in Power and Gas more than offset a substantial decline in Mobility. All three results were due to changes in the volume from large orders. Orders came in significantly lower in Germany, due to lower levels of large orders in Wind Power and Renewables and in Mobility compared to fiscal Orders in the Americas region were flat year-over-year, as growth primarily in Power and Gas, in Building Technologies and in Healthineers offset doubledigit declines in Wind Power and Renewables and in Energy Management, both due to a lower volume of large orders. U. S. orders increased moderately, supported by portfolio and currency translation effects, and mainly followed the pattern for the region, with the exception that Energy Management came in near the prior-year level. Orders went up in the Asia, Australia region due mainly to a higher volume from large orders in Energy Management and a clear increase in Healthineers, only partially offset by declines primarily in Power and Gas and in Wind Power and Renewables. China increased orders moderately, in particular with double-digit growth in Power and Gas, in Energy Management and in Healthineers. These increases were partly offset by decreases in Mobility, in Wind Power and Renewables and in Process Industries and Drives. Revenue (location of customer) Fiscal year % Change (in millions of ) Actual Comp. Europe, C. I. S., Africa, Middle East 41,819 38,799 8 % 8 % therein: Germany 10,739 11,244 (4)% (5)% Americas 22,707 21,702 5 % 1 % therein: U. S. 16,769 15, % 3 % Asia, Australia 15,118 15,135 0 % (1)% therein: China 6,439 6,938 (7)% (6)% Siemens 79,644 75,636 5 % 4 % therein: emerging markets 1 27,268 25,239 8 % 9 % 1 As defined by the International Monetary Fund. Reported revenue related to external customers went up moderately year-over-year and increased in most industrial businesses. Key growth drivers in Europe, C. I. S., Africa, Middle East included Power and Gas, Wind Power and Renewables and Mobility due to strong conversion from their respective order backlogs. These increases were partly offset by declines in Energy Management and in Process Industries and Drives. In Germany, revenues decreased moderately, primarily due to Wind Power and Renewables. In the Americas, revenue came in higher year-over-year, driven primarily by increases in Power and Gas, in Healthineers and in Mobility. Wind Power and Renewables reported a substantial decline. The pattern in the U. S. was nearly the same as for the region. Revenue in Asia, Australia came in near the prioryear level, as declines in Mobility and Process Industries and Drives offset growth in all other industrial businesses. In China, only Power and Gas, Healthineers and Building Technologies were able to increase revenue for the fiscal year. A.3.2 Segment information analysis A POWER AND GAS Fiscal year % Change (in millions of ) Actual Comp. Orders 19,454 15, % 16 % Revenue 16,471 13, % 12 % Profit 1,872 1, % Profit margin 11.4 % 10.5 % 10 Combined Management Report

13 Revenue and orders benefited from portfolio effects. Dresser- Rand and the Rolls-Royce Energy aero-derivative gas turbine and compressor business, which were both acquired in fiscal 2015, contributed nine and 12 percentage points to fiscal 2016 order and revenue growth, respectively. Orders increased year-overyear, due mainly to a higher volume from large orders in the solutions business, including in particular large orders for power plants, including service, from Egypt totaling 4.7 billion. The regional picture was mixed; order intake increased substantially in the reporting regions Europe, C. I. S., Africa, Middle East and the Americas and declined clearly in Asia, Australia. Revenue was also up, due mainly to growth in the solutions and large gas turbine businesses. On a regional basis, strong order execution led to substantial revenue growth in Europe, C. I. S., Africa, Middle East, particularly including in Egypt. Revenue also increased in the other two reporting regions. Profit was substantially higher year-over-year and included a continuing strong contribution from the service business. In fiscal 2016, profit benefited from positive effects totaling 118 million from the measurement of inventories. Both years included positive and negative effects related to large projects. In total, the effect in fiscal 2016 was positive, including 130 million from revised estimates related to resumption of long-term construction and service contracts in Iran following the ending or easing of EU and U. S. sanctions. In contrast, it was negative in fiscal 2015, including charges of 106 million related to a project which incurred higher costs for materials and from customer delays. Costs for the integration of Dresser-Rand were 59 million in fiscal 2016 compared to 19 million in fiscal Finally, severance charges were sharply lower in fiscal 2016, at 69 million compared to 192 million in fiscal The Division continues to face challenges in an aggressively competitive market for large gas turbines arising from overcapacities across the industry, which results in increased price pressure. A WIND POWER AND RENEWABLES Fiscal year % Change (in millions of ) Actual Comp. Orders 7,973 6, % 35 % Revenue 5,976 5,660 6 % 9 % Profit % Profit margin 7.8 % 2.8 % number of orders for large offshore wind-farms in the U. K., including service. Order intake in the Americas and Asia, Australia showed a double-digit decline year-over-year. Revenue was up clearly due to strong conversion from the backlog, which resulted in increases in all of the Division s businesses. On a regional basis, substantial increases in Europe, C. I. S., Africa, Middle East and Asia, Australia more than offset a substantial decline in the Americas. Strong profitability in fiscal 2016 included a more favorable revenue mix including a higher share from the offshore and service businesses, lower production and installation costs, and positive effects from project execution and completion. In fiscal 2015, profit was held back by expenses from ramping up commercialscale production of certain turbine offerings. A ENERGY MANAGEMENT Fiscal year % Change (in millions of ) Actual Comp. Orders 12,963 12,956 0 % 2 % Revenue 11,940 11,922 0 % 2 % Profit % Profit margin 7.5 % 4.8 % Order intake was flat year-over-year, burdened by negative currency translation effects, as a decline in the solutions business was offset by growth in the Division s other businesses. On a regional basis, a substantial increase in Asia, Australia and slight growth in Europe, C. I. S., Africa, Middle East were offset by a significant decline in the Americas. Revenue was also burdened by negative currency translation effects. A decline in the medium voltage and system business was offset by growth in the Division s other businesses, in particular in the solutions, high voltage products and transformer businesses. On a regional basis, moderate growth in the Americas was offset by a moderate decline in Europe, C. I. S., Africa, Middle East, while revenue in Asia, Australia was flat year-over-year. Stronger profitability in a majority of the Division s businesses compared to the prior-year included significant improvements in the high voltage products business and in the solutions business due to stringent project execution. The prior year included a higher proportion of projects with low margins. Severance charges were 71 million and 88 million in fiscal 2016 and fiscal 2015, respectively. Order intake reached a new high for a fiscal year, due mainly to a higher volume from large orders, particularly in the offshore business, which for Siemens means primarily in Europe. As a result, orders more than doubled in the Europe, C. I. S., Africa, Middle East reporting region and included, among others, a Combined Management Report 11